Download China and Asia in Global Trade Slowdown

WP/16/105
China and Asia in Global Trade Slowdown
by Gee Hee Hong
Jaewoo Lee
Wei Liao
Dulani Seneviratne
IMF Working Papers describe research in progress by the author(s) and are published
to elicit comments and to encourage debate. The views expressed in IMF Working
Papers are those of the author(s) and do not necessarily represent the views of the IMF, its
Executive Board, or IMF management.
© 2016 International Monetary Fund
WP/16/105
IMF Working Paper
Asia and Pacific Department
China and Asia in Global Trade Slowdown1
Prepared by Gee Hee Hong, Jaewoo Lee, Wei Liao, and Dulani Seneviratne
Authorized for distribution by Ranil Manohara Salgado
May 2016
IMF Working Papers describe research in progress by the author(s) and are published to
elicit comments and to encourage debate. The views expressed in IMF Working Papers are
those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board,
or IMF management.
Abstract
Asia and China made disproportionate contributions to the slowdown of global trade growth
in 2015. China’s import growth slowed starkly, driven by both external and domestic factors,
including a rebalancing of demand. Econometric results point to weak investment and
rebalancing as the main causes of the import slowdown. Spillover effects from China’s
rebalancing are estimated for some 60 countries using value-added trade data, and are found
to be more negative on Asia and commodity exporters than others.
JEL Classification Numbers: F14, F41, F42, F47
Keywords: trade linkages, trade elasticities, spillovers Author’s E-Mail Address:
[email protected], [email protected], [email protected], [email protected]
1
We appreciate comments and suggestions by many colleagues, including Elif Arbatli, Aqib Aslam, Emine
Boz, Paul Cashin, Diego Cerdeiro, Menzie Chinn, Rodrigo Cubero, Charles Engel, Joong Shik Kang, Martin
Kaufman, Rui Mano, Marcos Poplawski Ribeiro, Changyong Rhee, and Ranil Salgado. All remaining errors are
due to the authors. The views expressed in this paper are those of the authors and do not represent those of the
IMF or its policies.
2
Abstract ___________________________________________________________________1
I. Introduction ______________________________________________________________4
II. Global Trade Slowdown____________________________________________________5
A. Trade Slowdown in 2015 and Asia _____________________________________5
B. China as a Potential Source and Transmitter of Shocks______________________7
III. What Drove the Fall in China’s Goods Imports? _______________________________12
A. Main Causes ______________________________________________________12
B. Estimating the Import Equation _______________________________________14
C. Decomposition of Imports Slowdown __________________________________20
IV. Spillover from China’s Rebalancing ________________________________________22
A. Medium-Term Rebalancing Scenario __________________________________23
B. Trade Exposure to China ____________________________________________24
C. Spillover to a Country’s Exports to China in Value-Added Terms ____________26
1. Spillover Results: Unitary Rebalancing ____________________________27
2. Spillover Results: Medium-Term Growth Projections_________________ 30
D. Impact of China’s Consumption-Investment Rebalancing on Partner Country
GDP Growth ________________________________________________________32
1. Unitary Rebalancing __________________________________________ 34
2. Deducing the Role of Rebalancing in the Past Decade _______________ 34
3. Medium-Term Growth Projections_______________________________ 35
V. Conclusion _____________________________________________________________39
VI. References_____________________________________________________________40
VII. Appendix _____________________________________________________________42
A. OECD Input-Output Database ________________________________________42
B. Database _________________________________________________________43
Boxes
Box 1.
Box 2.
Box 3.
Tables
Table 1.
Table 2.
Table 3.
Table 4.
Propagation of Global Demand Slowdown through GVCs: The Role of
China__________________________________________________________ 8
Can China Explain Asia's Export Slowdown?_________________________ 10
Footprints of China's Rebalancing in Global Trade_____________________ 14
Imports of Goods (yoy growth, national accounts)______________________ 19
Imports of Goods and Services (yoy growth, national accounts)___________ 19
China: Import Growth Decomposition _______________________________ 22
Spillovers from China’s Consumption/Investment Growth Shock to GDP
Growth_______________________________________________________ 33
3
Figures
Figure 1.
Figure 2.
Figure 3.
Figure 4.
Figure 5.
Figure 6.
Figure 7.
Figure 8.
Figure 9.
Figure 10.
Figure 11.
Figure 12.
Figure 13.
Figure 14.
Figure 15.
Figure 16.
Figure 17.
Figure 18.
Figure 19.
Figure 20.
Figure 21.
Figure 22.
Figure 23.
Figure 24.
Figure 25.
Global Goods Trade Slowdown____________________________________ 6
Contribution to Global Trade Slowdown in 2009 and 2015________________ 6
Ultimate Sources of Demand for Exports _____________________________ 8
China's Place in Global Value Chains ________________________________ 9
Trade Income Correlations_______________________________________ 11
A Ration of Processing Imports to Total Exports_______________________ 13
Average Growth in Exports to the World and to China __________________14
GDP and IAD___________________________________________________15
Import Intensity in GDP Components________________________________16
Actual vs. Fitted Import Growth____________________________________17
Contribution to Import Growth _____________________________________20
China's Rebalancing Scenario over the Medium-Term ___________________24
Share of Domestic Value-Added for China's Final Demand by Region______ 25
Share of Domestic Value-Added for China's Final Demand: Taiwan Province of
China and New Zealand__________________________________________ 26
Impact of Unitary Rebalancing on Value-Added Exports to China_________ 28
Impact on Value-Added Exports to China in Asia: Unitary Rebalancing_____ 29
Average Impact on Value-Added Exports to China: Unitary Rebalancing____ 29
Impact on Value-Added Exports to China from the Projected Rebalancing: By
Region in 2016_________________________________________________ 30
Impact on Value-Added Exports to China from Rebalancing: By Region over
Medium-Term _________________________________________________ 31
Impacts on GDP Growth of a Unitary Rebalancing_____________________36
Impacts on GDP Growth of Asian Countries: Unitary Rebalancing_________36
Impacts on GDP Growth: Unitary Rebalancing________________________37
Impact of Historical Rebalancing on GDP Growth______________________37
Impacts on Regional Growth of the Projected Rebalancing_______________ 38
Different Measures of Shocks to Consumption and Investment____________ 38
Appendix Tables
Appendix Table 1.
Appendix Table 2.
Sensitivity of a Country's Value-Added Exports to China's Final
Consumption Demand______________________________________44
Sensitivity of a Country's Value-Added Exports to China's Final
Investment Demand _______________________________________45
4
I. INTRODUCTION
Global trade growth has slowed in recent years, both relative to income growth and its past
growth (Constantinescu and others 2015). The slowing accelerated in early 2015, particularly
in China and neighboring Asian countries. The prominence of China and Asia in the trade
slowdown of 2015 was a clear contrast to the previous episode of global trade slowdown in
2009 during the global financial crisis (GFC). Partly as a result, the slowing of China’s
imports generated keen interest as a possible harbinger of a much feared hard landing in
China.
We look into three related questions motivated by the role of China and Asia in the global
trade slowdown. First, we clarify the role that China played in the global trade slowdown in
recent years including 2015. We document the surprising weakness of China’s import growth
relative to its GDP growth, and the now large weight that China commands in the global
trade network. Next, we explore what explained the weakness of China’s import growth.
Slowing growth of investment and exports was the key driver, whereas the slowdown in the
aggregate GDP growth alone did not explain it well. We also see that, viewed over the past
decade, about a half of China’s import growth slowdown could be attributed to the
rebalancing of demand composition away from investment and exports and toward
consumption. Finally, we estimate spillover effects from the rebalancing of demand in China,
which is expected to progress further toward consumption in the coming years. In our
estimates, Asia will sustain a larger loss than other regions, and so will commodity-exporting
emerging markets.
Our results have several implications for the current policy discussion on trade and China.
While China made a large numerical contribution to the global trade slowdown in 2015, it
was not necessarily due to a slowing (or a collapse as often feared) of China’s overall
growth. China imported less partly because, as a hub in the global production network, it
transmitted a negative global demand shock which reduced its own exports to the rest of the
world. The transmission effect appears to have been particularly acute for Asian trading
partners which have been most closely intertwined with China in the global value chain
(GVC).
Spillover effects from the rebalancing of China’s demand are mostly negative in the short
term, while turning positive—or at least less negative—over the medium term, as the
rebalancing will lead to a higher and more sustainable growth in the medium term. The
economy rebalances away from an excessively high level of investment to a more
consumption-led economy, and eventually experiences a positive growth dividend. While
some countries are estimated to reap immediate gains owing to their high exposure to
China’s consumption demand, most countries will suffer for a while as their exports to China
are geared more to China’s investment demand. These results imply that China’s trading
5
partners will have several more challenging years in their trade with China, while China goes
through reform and restructuring (IMF 2015).
Our paper also makes several contributions to the applied research literature. We discuss
statistical evidence on China’s rising role in the global trade network, which strengthens its
potential as a source and transmitter of global shocks. Its role as a source grows in proportion
to its sheer size and share in the global trade, and its role as a transmitter strengthens with its
function as a hub in the global value chain. Next, building up on Bussière and others (2013),
we extend the import adjusted demand (IAD) for China up to 2011, the most recent year for
which input-output tables are available, and provide another affirmation of the usefulness of
the IAD for a question of global economic significance. To gauge spillover effects from the
rebalancing, we estimate the separate effects that China’s consumption and investment each
have on exports and growth of trading partners. This is a meaningful contrast to the existing
literature on China’s spillover that has estimated the effect of an aggregate GDP growth
slowdown in China, without accounting for the composition of aggregate demand (for
instance, Moazzami and Wong (1988), Tang (2003), IMF (2014), Cashin and others (2016),
and Dizioli and others (forthcoming)). By using value-added trade data, we also provide
information on each country’s exposure to China via both direct and indirect trade linkages.
The rest of the paper is organized as follows. Section II lays out factual information on the
global trade slowdown, and the changing (rising) importance of China in the global trade
network. Section III discusses the slowdown in China’s imports, including the econometric
estimates of import equations. Section IV discusses the spillover effects from China’s
rebalancing from investment toward consumption. Section V concludes.
II. GLOBAL TRADE SLOWDOWN
A. Trade Slowdown in 2015 and Asia
Global trade growth has been sluggish for several years, both in absolute terms and relative
to the global growth. In the first half of 2015, combined with weak commodity prices, the
sluggish growth in trade volume led to an outright decline in the value of world trade (Figure
1).
Moreover, China’s contribution to the global trade slowdown was unusually large in 2015, in
a clear contrast to the 2008-09 period when all regions contributed to the trade slowdown
(Figure 2). To look at goods trade slowdown from the import side, China made a big negative
contribution to global goods import volume growth in 2015, while both the United States and
euro area made sizable positive contributions to global import volume growth. Non-Asian
emerging markets as a bloc also made a big contribution to the slowdown in global import
growth. On the export side, China and Asia made by far the largest negative contribution to
the slowdown in global export growth in 2015.
6
Figure 1. Global (Goods) Trade Slowdown
World: Growth in Exports and Real GDP
World: Growthpercent
in Exports
and Real GDP
(Year-over-year
change)
World export volume growth
Real GDP growth
World export value growth
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: IMF staff estimates.
Figure 2. Contribution to Global Trade Slowdown in 2009 and 2015
(Percentage points)
Contribution to Change in Global Export
Contribution
to Change in Global Export Volume Growth
Volume
Growth
2009 minus 2008
Contribution to Change in Global Import
Contribution
to Change in Global Import Volume Growth
Volume
Growth
2008-09
2015 minus 2014
1.0
1.0
0.0
0.0
-1.0
-1.0
-2.0
-2.0
-3.0
-3.0
-4.0
2014-15
-4.0
-5.0
United
States
Japan
Source: IMF staff calculations.
Euro area
Source: IMF staff calculations.
Other AEs
China
Asia ex. Other EMs
CHN, JPN,
AUS, NZL
-5.0
United
States
Japan
Euro area
Other AEs
China
Asia ex. Other EMs
CHN, JPN,
AUS, NZL
7
B. China as a Potential Source and Transmitter of Shocks
Regional comparison of trade volume growth raises questions on the role that China played
in the global trade slowdown, either as a source or a key transmitter of shocks. China can be
a strong transmitter of global demand slowdown, given the central role played by China in
global value chains. As the GVC expanded rapidly starting in the early 2000s, China seized
the opportunity—facilitated by its WTO membership since 2001—and integrated itself
tightly into global trade to become the “world factory.” China imports capital and
intermediate goods from its trading partners, and exports finished products to final
destinations all over the world. When the demand from final destinations declines, China’s
exports will decline, in turn lowering China’s imports and regional trading partners’ exports
to China as well as to other destinations (Box 1).2
The role of China as a source of shocks has gained importance for two reasons. The first is
due to the increase in China’s weight in world trade. In value-added terms, world’s exports to
China as the final destination increased dramatically in recent years, from 1 percent of total
exports to 7 percent in 2011 (Figure 3). For Asian countries excluding China, this share was
16 percent in 2011, the same as the United States. Changes in China’s demand will have that
much more influence on Asian trading partners. Indeed, Box 2 shows that countries with
tighter GVC links with China have experienced a larger decline in the correlation between
their exports and partner-country GDP.
Next, given China’s rising share in world’s exports and its central role in GVCs, the
structural change in China’s import demand composition can impart meaningful shocks to
the global trade. Since exports and investment are in general more import intensive than
consumption, any compositional shift in import demand could change the level of import
demand. Structural changes include external rebalancing (from export-driven to domestic
demand driven-growth), internal rebalancing (from investment-based to consumptionoriented growth), and on-shoring (substituting imported goods by domestically-produced
goods). This is discussed further in the rest of the paper.
2
This transmission effect on regional “gross” trade can be amplified, since international trade is usually
measured in gross terms, and intermediate products could cross international borders multiple times during the
processing stage given the vertical trade structure.
8
Figure 3. Ultimate Sources of Demand for Exports
DVA in Foreign Final Demand by Ultimate Destination: 2011
(Percent
ofFinal
total)
DVA
in Foreign
Demand by Ultimate Destination: 2011
(In percent of total)
Ultimate
destination:
Ultimate
destination:
RoW
100
90
80
70
60
50
40
30
20
10
0
20
22
12
5
15
Euro area
19
9
7
4
16
16
Europe ex EA
21
World
31
14
9
5
21
7
19
LATAM6
30
29
Asia ex
China
China
17
USA
23
11
5
10
China
20
Asia ex China
18
17
34
35
17
2
12
4
11
21
10
13
6
22
USA
31
8
12
15
3
10
4
9
9
5
22
9
24
LATAM6 Europe ex Euro area Rest of the
EA
world
Source: OECD-WTO TiVA database; and IMF staff calculations.
Box 1. Propagation of Global Demand Slowdown through GVCs: The Role of China
This box discusses the weight of China in global value chains (GVC), which suggests that
China’s role as a transmitter of global demand through GVCs has increased over time. With
production segmentation along the GVCs, parts of goods could be shipped across borders
multiple times. Such goods would have a large propagation—magnifying effect of GVCs—
through the import content in exports (i.e. backward linkages) as well as through the domestic
value added exported for re-exporting purposes (i.e. forward linkages).
Since 2005, China’s forward linkages and backward linkages in GVCs have increased. Figure
4 illustrates China’s domestic value added exported through 35 different sectoral GVCs, in
percent of world’s total value added in each GVC. In several key GVCs, Chinese value added
now amount to 5–12 percent of the world total (whereas the median country contributes less
than 1 percent of the world total). A shock or slowdown in the final demand elsewhere would
hinder China’s GVC-related value added (i.e. a reduction in trade along forward linkages). In
particular, in GVCs such as textiles and electronics, China’s domestic value added share
amounts to about 10 percent of the total—a significantly higher amount compared to that of
the median economy’s contribution which amounts to less than 1 percent in value added
terms.
9
A decline in China’s forward linkages driven by a slowdown in the global final demand
would further propagate to China’s upstream trade partners. China’s backward linkages now
ranges between 15–40 percent of the global share in about 10 large GVCs, suggesting that
spillovers to upstream economies transmitted through China are now even larger than before.
For instance, the import content China receives related to electronics for re-exporting now
amounts to almost 40 percent of the total in world’s electronics GVC trade; this is
considerably higher compared to 0.3 percent backward linkages of the median economy in the
electronics GVC trade based on a sample of 62 countries.
Figure 4. China’s Place in Global Value Chains
China’s Backward Linkages in GVCs: 2005 vs.
2011
China's Backward Linkages in GVCs: 2005 vs. 2011
(In percent
of total
valueadded
addedinin each
each GVC;
linkages=import
contentcontent
in Chinese
(Percent
of total
value
GVC;backward
backward
linkages = import
in exports)
Chinese exports)
40
(Percent
of total
value
eachGVC;
GVC;
forward
linkages = Chinese
DVA in
foreign
(In percent
of total
valueadded
added in
in each
forward
linkages=Chinese
DVA in foreign
exports
) exports)
12
Electronics
35
Textiles
30
10
Other transport eq.
Electronics
Telecom
M/C, other Manuf, other
Motor vehicles
Construction
R&D
Wwholesale, retail
Electrical machinery
8
25
Other minerals
Metal products
Wood products Manuf, other
Rubber
20
15
2011
2011
China’s Forward Linkages in GVCs: 2005 vs.
2011
China's Forward Linkages in GVCs: 2005 vs. 2011
M/C, other
Chemicals
Paper
Other transport eq.
R&D
10
Textiles
Hotels & restautantsMining Electrical machinery
Transportation
Real estate
Paper Rubber Metal products
Agriculture
Business services:
Basic metals
computers
Wood products
Food & bev. Chemicals
Other minerals
6
4
Financial services
5
2
Fuel
0
0
5
10
15
20
2005
Source: OECD-WTO TiVA database.
25
30
35
40
0
0
2
4
6
2005
8
10
12
10
Box 2. Can China Explain Asia’s Export Slowdown?
This box explores a possible structural change in the relationship between trade and income
in Asia over time. Exports of Asian countries over the past several years indeed seem to have
been affected by their trade (especially GVC) linkages with China. Correlation between
export growth and trade-partner GDP growth declined over the 2012–15 period for many
Asian countries, and by a larger margin for countries with tighter GVC links with China..
Export growth in Asia has slowed markedly in 2015. As presented in Figure 2, Asia
(excluding China) stands out as the largest contributor to the slowdown in the global export
growth over 2014–15. In fact, export growth slowdown in Asia has been an ongoing concern
for policymakers since the global financial crisis – the export growth in the region dropped to
an average growth rate of 4 percent from 2012 to 2014, after averaging 11 percent during the
decade before the global financial crisis. While some part of the slowdown is due to cyclical
factors such as the weakness in global demand, Hoekman (2015) also attributes to some
structural factors that has resulted in lower trade income elasticity.
The sensitivity of export growth to the demand for these exports, often measured as real GDP
growth of trading partner countries, has indeed been weakening for several years. We
calculate the time-varying correlation between export growth and demand (trade-partner
GDP), controlling for the exchange rate. We net out the role of the real effective exchange
rates in these two variables first by regressing each of them on real effective exchange rates.
To track over-time variation in correlations between export and trade-partner GDP (income)
for each country, we calculate the rolling-window (16-quarter) correlations. For most of the
countries, we observe a steep decline in the correlations since 2012 (Figure 5).
Furthermore, the bottom-right scatter plot of Figure 5 shows a negative correlation between
the degree of GVC integration with China and the decline in the trade-income correlation in
the last four years in selected Asian countries. These patterns are little affected when
introducing the dummy variable for GFC periods. This channel could have been a part of the
explanation for the very large negative contribution made by non-China Asia to the 2015
slowdown in global export volume growth, while making a small contribution to the
slowdown in global import volume growth.
Given China’s rising role in world’s exports and GVCs, the structural change in its import
demand composition could have affected the region’s trade sensitivity to demand. Since
exports and investment are more import intensive than consumption, a compositional shift in
import demand toward consumption (rebalancing) could have lowered the sensitivity with
greater intensity for countries with tighter GVC links with China. Moreover, the import
substitution taking place in China (on-shoring) could have contributed to the decline of the
sensitivity of exports to income in these countries with a high trade exposure to China,
consistent with the findings in other work (IMF 2016b).
11
Figure 5. Trade-Income Correlations
PHL, SGP,
THA:THA:
Export-Income
Correlation Correlation
PHL,
SGP,
Export-Income
1
PHL
SGP
THA
TWN,
HKG,
Export-Income
TWN, HKG,
IND:IND:
Export-Income
Correlation Correlation
0.8
HKG
IND
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0
-0.4
-0.2
-0.6
-0.4
IDN, KOR,
KOR, MYS:
Export-Income
Correlation Correlation
IDN,
MYS:
Export-Income
IDN
KOR
MYS
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
0
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
-0.2
1
TWN
1
Asia: Trade Linkages with China and the
Asia: Trade Linkages with China and the Decline in Export-Income Correlation
Decline in Export-Income Correlation
0.2
Difference (2015Q2-2012Q1)
0.8
0.6
0.4
0.2
0
-0.2
-0.4
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
-0.6
Source: IMF staff estimates.
y = -0.0381x - 0.2164
R² = 0.3654
AUS
0
IDN
IND
NZL
-0.2
-0.4
-0.6
SGP
JPN
THA
PHL
HKG
KOR
-0.8
MYS
-1
TWN
-1.2
0
5
10
15
GVC integration with China (2011)
20
12
III. WHAT DROVE THE FALL IN CHINA’S GOODS IMPORTS?
What were the main causes of China’s import growth slowdown? Rather, what were the
relative roles of different causes? How big a role was played by the change in the
composition of demand? We first discuss the likely causes and their recent movements, and
then present the econometric results.
A. Main Causes
Our empirical findings attribute the decline in China’s import growth to four causes: two
primarily associated with the level of demand and the other two associated with the
composition of demand (text table). However, we do not find evidence that the appreciation
of China’s real effective exchange rate over the past several years played a statistically
significant role in its import growth slowdown.
China’s role \ Effect on Demand
China as a Source of Shocks
Level of Demand Composition of Demand
Demand in China On-shoring
Rebalancing
China as a Transmitter of Shocks Global Demand
Global Demand. Weak demand in China’s export destinations reduces China’s exports and
imports of inputs, reflecting the role China has played as the key downstream leg in GVCs.
The source of shocks can be both advanced and emerging-market economies, as China’s
exports have widely diversified destinations. Although the world economy has slowly
recovered from the deep recession after GFC, the recovery has had many turns and twists.
The growth momentum has remained soft in Europe, while the weak performance in
emerging markets has added further uncertainty to growth prospects.
Demand in China. Meanwhile, weak domestic activity in China may also suppress its
imports. Indeed growth in China has been moderating, as a by-product of the authorities’
attempt to contain risks—accumulated since the global financial crisis—and the effort to
move the economy away from the unsustainable growth path to a slower and more balanced
growth model. The GDP growth slowdown is also a natural outcome of successful economic
development which narrows room for high-speed catch-up growth. As the growth slowed
from double digits before the GFC to 6.9 percent in 2015, China’s demand for imports would
have declined as well.
Rebalancing. An important part of China’s transition is a shift away from exports towards
domestic demand, and within the latter from investment to consumption, a less importintensive sector. On the production side, transition away from the import- and investmentintensive manufacturing sector toward a more domestic demand-oriented service sector will
13
be the primary channel. This will lower import growth even without a change in the level of
economic activity.3 Since the late 1990s, the share of consumption in GDP (in nominal
terms) has risen slightly, by 1½ percentage points, on account of strong private consumption
in the urban area. In real terms, investment growth has halved since 2011.
On-shoring. Lastly, progress in China’s technological sophistication increases the share of
domestically-produced capital and intermediate goods, lowering import demand. It involves
import substitution, under which Chinese corporations domestically produce capital or
intermediate goods that used to be imported from advanced economies. Evidence of onshoring—or rebalancing away from exports—can be seen in the movement of the ratio of
processing imports to exports, as shown in Figure 6. Except for the jump around trade
collapse in 2009, and another blip in the mid-2014, possibly due to the introduction of a new
mobile phone model, the ratio shows a declining trend over the past decade. Incidentally, the
decline in the ratio of intermediate imports to exports seems to have accelerated in 2015.
FigureA6.ratio
AofRatio
of Processing
Imports to Total Exports
processing
imports to total exports
(Percent)
(in percent)
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
01Q3 03Q1 04Q3 06Q1 07Q3 09Q1 10Q3 12Q1 13Q3 15Q1
Sources: CEIC; and IMF staff estimates.
Exchange Rates. The RMB exchange rate has been on appreciating trend in real effective
terms since the reform in 2005. Theoretically, it should have boosted China’s import demand
as foreign goods become cheaper, but many empirical studies have found limited impact of
the REER on China’s imports (Ahmed 2009, and Cheung and others 2012). The traditional
relative price channel could get complicated by the GVC structure in the region (Liao and
others 2011 and Cheng and others 2015): an appreciation lowers exports, and can thereby
lower import demand.
3
Greater efficiencies, especially in the energy sector, could also lead to lower energy-related imports.
14
Box 3. Footprints of China’s Rebalancing in Global Trade
Average Growth
in Exports
the World andtotothe
ChinaWorld and to China
Figure 7. Average
Growth
in toExports
(Average year-on-yeargrowth
betweenbetween
2012-14) 2012–14)
(Average
year-on-year growth
World
China
10
5
0
-5
-10
Capital
Consumption
Intermediate
Source: IMF staff estimates.
Trade data show signs of rebalancing from investment toward consumption, although
consumption imports are still a small share of China’s total imports. The average growth rate
of China’s consumption imports has been increasing much faster than the world average,
while China’s capital goods imports growth contracted sharply against the slightly positive
growth rate of the world average (Figure 7).
Changing shares of China’s goods and service trade in total trade are another sign of
rebalancing. The slowdown in China’s imports since the last quarter in 2014 has been driven
by a sharp contraction in goods imports, while service imports have been going strong. If any,
China’s service import growth has been gaining speed over previous years. Strong service
imports are unlikely to have been inputs for exports, which have been declining. Instead, the
recent strength of service imports is suggestive of strong domestic demand, consistent with
rebalancing.
B. Estimating the Import Equation
To quantify the contribution of the four drivers to China’s import slowdown, we estimate a
conventional trade elasticity equation. Let denote imports, denote demand, and
denote the real effective exchange rate.
15
In growth rate, the relation is given by the following equation.
Here is a vector of control variables, including lags of dependent variable and regressors.
We use robust standard errors, which are consistent regardless of serial correlation and
heteroskedasticity in .
We take a two-step empirical strategy. Following Bussière and others (2013), we first
construct the import-adjusted demand (IAD), which can be a better measure of an effective
demand for imports. Import intensity-adjusted measure of demand (IAD) is:
where
,
,
are import intensities of C(private consumption), G(public
consumption), I(investment), and X(exports) respectively4, and the import intensities have
been normalized to sum up to one in each period.
Figure 8. GDP and IAD
(Real
growth,
percentage points)
GDP and
IAD
(real growth, in percentage points)
20
GDP
IAD
15
10
5
-5
2001Q1
2001Q4
2002Q3
2003Q2
2004Q1
2004Q4
2005Q3
2006Q2
2007Q1
2007Q4
2008Q3
2009Q2
2010Q1
2010Q4
2011Q3
2012Q2
2013Q1
2013Q4
2014Q3
2015Q2
0
Source: Source:
IMF staff
IMFestimates.
staff estimates.
When the GFC triggered the trade contraction in 2009, trade declined much faster than the
GDP slowdown. First used by Bussière and others (2013), IAD did a better job of explaining
the trade collapse than GDP when used as a measure of demand (Figure 8). The reason lies in
4
The method of estimating import intensity for different GDP components using input-output table is discussed
in the appendix.
16
the fact that different GDP components have different import intensities: investment and
exports are in general more import-intensive than consumption. By adjusting the importintensity of different GDP components, IAD better captures the effective demand for
imports. As investment and exports are much more pro-cyclical than consumption, the sharp
reduction of these two components during crisis could cause trade to contract more severely
than GDP growth.
Figure 9. Import Intensity in GDP Components
Figure
(In percent) 9. Import Intensity in GDP Components
Consumption
30
Government
Investment
Export
25
20
15
10
5
0
1995
2000
2005
2006
2007
2008
2009
2010
2011
Source:
and IMF staff
estimates.
Sources: WIOD;
World Input-Output
Database;
and IMF staff estimates.
Figure 9 presents the import intensity for each GDP component of China updated to 2011
using the currently available input-output tables. The results are intuitive, showing that
investment and exports indeed are more import-intensive than consumption (private and
public). The intensities peaked in 2005, but there seems to have been a downward trend in
these intensities since then, with a short-lived recovery in 2010. This partly reflects the onshoring in China—substituting domestic inputs for imported inputs (intermediate goods),
especially if the trend continues after 2011 as the decreasing share of intermediate imports in
exports suggests. Our finding is consistent with previous studies, including Koopman, Wang,
and Wei (2012), and Kee and Tang (2015).
17
Figure 10. Actual vs. Fitted Import Growth
Actual vs. Fitted Import Growth
0.40
Actual imports growth
Fitted values based on IAD
Fitted values based on GDP
Fitted values based on domestic demand
0.30
0.20
0.10
0.00
-0.10
-0.20
-0.30
Source: IMF staff estimates.
Among different measures of demand (IAD, GDP and domestic demand), the IAD in general
explains trade flows best, consistent with the literature (Figure 10). The income elasticity is
around 1.5 to 2, depending on the model specification and sample periods. However, while
the fitted value of imports from IAD regression tracks the 2009 trade collapse very well, the
model could explain only part of the 2015 trade contraction. One reason is that the inputoutput table is only available up to 2011, and we have kept the import intensity constant after
that. This could lead to a less accurate measurement of IAD if the import intensity of
different GDP components has since changed significantly. In addition, there could be factors
other than income or relative prices driving trade flows, and the movement of these factors
could have become more significant recently.
For trade flows, we use goods and service trade data from national accounts, as well as goods
trade only. It is goods trade that contracted sharply, being often referred to as “trade
collapse” in 2015, and thus we will decompose the impact of different drivers on import
slowdown based on regressions using goods trade. Service imports, on the contrary, have
been on a rising trend as tourism has been increasing sharply in recent years, and the
economy is shifting away from traditional manufacturing industries to the service sector. For
robustness, we estimate different models using simple OLS and dynamic OLS. The results
we report are broadly consistent across different model specifications and estimation
methods. As we use growth rates of all variables in the regressions, co-integration is less of a
concern. In addition, we examined whether different methods of de-trending matter, and we
found using HP-filtered series in the estimation produces broadly similar results.
18
Table 1 reports the results of estimation for the volume of imports in goods over 2005Q1–
2015Q3 and for a longer sample 2000Q1–2015Q3. For a robustness check, we report results
from estimation using trade in goods and services from national accounts data (IMF WEO
database) in Table 2. In both tables, the dependent variables are real growth of imports, while
the right hand side (RHS) variables are year-on-year growth rate of total demand, proxy for
on-shoring, and the REER. We also added a time dummy for the GFC to control for the
extreme trade movement during 2008Q3 to 2009Q2. In general, regressions using IAD as a
measure of total demand produce a better fit, especially in recent years (2005Q1 to 2015Q3).
Our on-shoring proxy is significantly positive across different model specifications, as
expected (notice that higher the proxy, lesser on-shoring). The income elasticity is in general
sensible and consistent with the literature.
The model using domestic demand and controlling for exports explicitly sometimes performs
better compared to the model using IAD, based on R-squares. This may reflect the
importance of exports in driving China’s imports, while the IAD could become less accurate
as the import-intensity is assumed constant after 2011 due to data availability. It also worth
noticing that the income elasticities estimated using a longer sample are in general smaller,
suggesting structural changes may have occurred. This is very likely as China joined WTO in
2001 and the longer sample covers this period of a rapidly transforming trade structure. Kang
and Liao (2016) also report the results of using the GDP components separately, which are
often statistically weaker than the IAD-based results.
For the period after the 2005 exchange rate reform, the REER5 is statistically insignificant
across different model specifications. However, we find the price elasticity generally bears a
negative sign for most model specifications, implying that China’s demand for imported
goods decreases when the purchasing power of the RMB rises. Though counter-intuitive, the
ambiguous impact of exchange rate on China’s trade is well established in the literature
(Ahmed 2009, and Cheung and others 2012). The findings of insignificant price elasticity
could be due to the classical simultaneity and omitted-variable biases, as pointed out by
Orcutt (1950). However, in the case of China, a common hypothesis is that China has been
intensively integrated into the global value chains, using a lion’s share of imported goods to
produce exports, and thus that the “net” effect of relative price movement on imports could
be muted or even opposite to what the classic demand theory predicts, once impact on
exports is considered. In our regressions, exports is controlled, either as a separate regressor,
or as part of aggregate demand. Exchange rate could affect exports, then affect imports
indirectly. Kang and Liao (2016) use a second stage regression to further explore the impact
of REER on imports, transmitted by exports. The exchange rate depreciation still increases
trade balance, as it increases exports, while having little effect on imports (right or wrong
sign).
5
We use CPI-based REER in this analysis. Using PPI-based REER also results in insignificant price elasticity.
19
Table 1: Import of Goods (yoy growth, national accounts)
Table 1: Imports of Goods (yoy growth, national accounts)
IAD
Model 1
Model 2
1.924***
(9.508)
1.413***
(4.548)
GDP
Model 3
Model 4
2.147***
(5.102)
1.636***
(3.962)
Domestic Demand
Exports
REER
0.026
(0.163)
0.559***
(7.761)
-0.054**
(-2.526)
-0.049**
(-2.047)
Onshoring
GFC dummy
Constant
Observations
38
R-squared
0.927
RobustIMF
t-statistics
in parentheses
Source:
staff estimates.
Note:
Robust t-statistics
*** p<0.01,
** p<0.05,in*parentheses.
p<0.1
Table
Import* p<0.1
of Goods
***
p<0.01,2:
** p<0.05,
Model 5
Model 6
0.748***
(3.349)
0.503***
(8.630)
0.614***
(3.804)
0.395***
(4.572)
-0.586**
(-2.036)
0.526***
(5.518)
-0.045
(-1.635)
0.013
(0.357)
-0.206
(-0.794)
0.647***
(5.187)
-0.146***
(-5.045)
-0.053
(-1.256)
-0.795***
(-3.005)
0.563***
(5.059)
-0.110***
(-3.683)
0.004
(0.100)
-0.245
(-0.914)
0.674***
(6.140)
-0.054**
(-2.230)
0.014
(0.449)
-0.565**
(-2.271)
0.526***
(4.313)
-0.055**
(-2.406)
0.034
(1.292)
53
0.851
38
0.855
53
0.824
38
0.907
53
0.889
and Services (yoy growth, national accounts)
Table 2: Imports of Goods and Services (yoy growth, national accounts)
IAD
Model 1
Model 2
1.715***
(10.133)
1.230***
(4.339)
GDP
Model 3
Model 4
1.837***
(4.885)
1.382***
(3.836)
Domestic Demand
Exports
REER
Onshoring
GFC dummy
Constant
0.090
(0.570)
0.411***
(7.404)
-0.079***
(-5.381)
-0.028
(-1.471)
Observations
38
R-squared
0.938
RobustIMF
t-statistics
in parentheses
Source:
staff estimates.
Note:
Robust t-statistics
*** p<0.01,
** p<0.05,in*parentheses.
p<0.1
*** p<0.01, ** p<0.05, * p<0.1
Model 5
Model 6
1.362***
(7.997)
0.520***
(9.503)
1.180***
(5.165)
0.301***
(3.402)
-0.490*
(-1.894)
0.396***
(4.974)
-0.071***
(-3.076)
0.032
(0.981)
-0.142
(-0.589)
0.484***
(5.047)
-0.160***
(-7.052)
-0.024
(-0.633)
-0.679***
(-2.985)
0.427***
(4.981)
-0.127***
(-5.033)
0.028
(0.758)
0.091
(0.622)
0.382***
(6.445)
-0.088***
(-5.265)
-0.045**
(-2.093)
-0.665***
(-2.798)
0.259***
(3.205)
-0.088***
(-3.280)
0.001
(0.041)
53
0.849
38
0.854
53
0.820
38
0.940
53
0.878
20
C. Decomposition of Imports Slowdown
We decompose the effects of different GDP components on real imports of goods. Our
calculation is based on the regression using IAD as China demand, which provides the best
fit among different income measures (Table 1, Column 1). As the IAD variable is a weighted
average of GDP components, we can divide the total effect of IAD into consumption,
investment and exports, making use of the information from the import-intensity weights
(Figure 11)6. In addition, as the regression includes the proxy for on-shoring, we can assess
the contribution of on-shoring to imports slowdown.
Figure 11. Contribution to Import Growth
Contribution to Import Growth
(Percentage points)
Onshoring
(In percentage points)
Consumption
Investment
Exports
Government
Imports
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
2015Q3
50
40
30
20
10
0
-10
-20
-30
staff estimates.
Source:Source:
IMF staffIMF
estimates.
Table 3 decomposes import growth slowdown over the past decade, divided into two fiveyear intervals of 2006–10 and 2011–15. The first column shows that the average growth rate
of goods imports during 2011–2015 declined by 6.8 percentage points compared to the
average over 2006–2010. The IAD more than fully explains it, by predicting a decline of 7.2
percentage points. Among the components of IAD, investment and exports (external
demand) played a big part. External demand dragged imports down by 1.5 percentage points,
while domestic demand, consisting of private and public consumption as well as investment,
contributed 5.8 percentage points. Within domestic demand, weaker investment caused
import growth to decline by 3.9 percentage points, while private consumption only
contributed to trade slowdown marginally. This is consistent with the view that China’s
private consumption held up well, but investment weakened significantly, party driven by the
housing market correction, and partly due to policy-induced rebalancing.
6
One can also separate the effects by directly using GDP components in the model as regressors (for instance,
Kang and Liao 2016). Results are broadly consistent.
21
Our on-shoring measure, processing imports as a share of exports (which can also reflect
GVC-related structural changes in trade)7, contributed 0.5 percent, as the pace of on-shoring
slowed over the last few years except in 2015. It seems that on-shoring (measured by our
proxy) accelerates in 2015 Q1–Q3, which was a big drag on import contraction in early
20158. However, without an accurate measure, it is hard to say whether this was temporary or
a more long-term trend.
How big is the role of rebalancing in this? Rebalancing is the key element of China’s
comprehensive structural reform. A full-fledged rebalancing includes both external
rebalancing (from export-led growth to a more domestic demand-driven economy), as well as
domestic adjustment such as shifting away from excessive investment to greater
consumption, and promoting the service sector while cutting overcapacity in manufacturing.
Here we perform a counterfactual calculation based on a particular version of nonrebalancing scenario. Assume that consumption, investment, and exports growth rates
decline at the same pace as the GDP growth rate over the 2012–15 periods. It is worth noting
that the growth moderation in China after GFC is partly driven by the weak global economy
and thus sluggish external demand has been already reflected in the non-rebalancing
scenario, helping us to separate the impact of rebalancing from the aggregate growth
slowdown.
Table 3 presents the roles of different factors behind the import growth slowdown. The
second column shows the decomposition for a non-rebalancing scenario, in which
consumption would make a bigger negative contribution, while investment and exports make
less negative contributions. The third column, the difference between the first and second
columns, is a measure of the effect of rebalancing. Consumption makes a positive
contribution, while investment and exports make negative contributions. In sum, the
rebalancing accounts for about a half of the actual import slowdown.
7 Conceptually, on-shoring refers to Chinese companies’ production substituting for previous. It can be
measured by the decreasing share of foreign value added in gross exports and final domestic demand from the
OECD-WTO’s Trade in Value Added (TiVA) database, which is available only up to 2011. Our proxy broadly
follows the similar pattern observed in foreign value added share in gross exports and final domestic demand in
TiVA database during overlapping periods, and shows a continued downward trend at a similar pace in recent
years.
8
We acknowledge that there could be a potential endogeneity problem as the numerator of this variable is a
component of the import demand. However, this series shows the similar trend as an alternative measure (a
share of foreign value added in gross exports and domestic demand) which is less subject to endogeneity
problem but has relatively short sample period.
22
Table 3. China: Import Growth Decompostion
Table
3. China:
(In percentage
points) Import Growth Decomposition
(Percentage points)
Imports
IAD
Domestic Demand
Consumption
Government
Investment
External Demand
Onshoring
Residual
2012-2015
over 20062011
-6.8
-7.2
-5.8
-0.7
-1.2
-3.9
-1.5
0.5
-0.1
If no
Rebalancing
Effect of
Rebalancing
-1.3
0.6
-1.3
0.1
-2.6
-1.6
Net effect
-3.6
Source: IMF staff estimates.
Source: IMF staff estimates.
IV. SPILLOVER FROM CHINA’S REBALANCING
In addition to the role it played in imports slowdown over the past decade, rebalancing has
been pursued by the Chinese authorities to achieve slower, more sustainable, consumptionled growth (IMF 2015). Progress has been slow so far but could speed up if the authorities
make further progress on key structural reforms outlined during the Third Plenum.
Considering the rising importance of rebalancing, we explore its implications along the
following questions. What is the implication of rebalancing on the exporters to China? What
is the implication on the growth of a country that is exposed to China through trade linkages?
Who are likely to benefit (or lose) from these changes? China’s final consumption and final
investment, to bring out the difference between exports for ultimate uses in consumption and
investment of China, we work with trade data in value-added terms.
In our spillover analysis, we focus on China’s internal rebalancing: moving away from
investment-driven growth model to a more consumption-based economy, which is
intertwined with but not identical to external rebalancing from exports to domestic demand.
We start with a unitary rebalancing, defined as a shift of growth from investment to
consumption when the consumption growth rate increases by 1 percentage point and the
investment growth rate declines by 1 percentage point. As China’s consumption and
investment have similar shares in GDP, the unitary rebalancing is largely growth neutral and
captures the effect of pure rebalancing. However, the medium-term story will inevitably be
more complicated. For instance, a lack of rebalancing can result in rising vulnerability and
thus much lower growth several years later, which will hurt partner countries and the world
economy as well. In contrast, a successful rebalancing will lead to a more balanced and
23
sustainable growth model for China, thereby benefiting the whole world in the long run. As a
significant endogenous consequence is likely to materialize in the medium term, we base our
medium-term analysis on full-fledged projections of scenarios with and without rebalancing.
We proceed as follows.
 We look at the export profiles of each country in relation to China’s final demand in
value-added terms.
 We measure the ‘sensitivity’ of the domestic value-added used for China’s final
consumption (or investment) with respect to the change in China’s consumption (or
investment). These measures of ‘sensitivity’ are used to estimate the effects on each
country’s value-added exports that result from China’s rebalancing.
 We assess the growth implications coming from China’s rebalancing, by estimating
how shocks to China’s consumption (or investment) have varying impacts on a
country’s growth depending on the country’s trade linkages to China.
A. Medium-Term Rebalancing Scenario
Figure 12 presents illustrative simulations of the future reform and rebalancing, to form the
basis of several calculations afterwards. They are virtually identical to those discussed in the
2015 China Staff Report (IMF Country Report No. 15/234). Some rebalancing toward
private consumption occurs over the medium term, accompanied by a sharper decline in
investment. In this exercise, the reform-and-rebalancing scenario is the baseline scenario,
while the counter-factual scenario is the growth path which can be a result of unsuccessfully
implemented reforms.
Under the rebalancing scenario, the overall growth is lower compared to the counterfactual in
the near term. However, the rebalancing resulting from successful reforms will lead to a
higher and sustainable growth in the medium-term.
In the baseline scenario, both consumption and investment growth will be lower than under
the counterfactual until 2017. Positive gains from the overall rebalancing will start to
materialize in 2019, supported by stronger growth of both consumption and investment
compared with the counterfactual scenario. The shift of composition from investment to
consumption, however, begins to take place in the near term, as the (negative) difference in
growth between the counterfactual and the baseline is larger for investment than
consumption.
24
Figure 12. China’s Rebalancing Scenario over the Medium-Term
China: GDP Growth Under Various Scenarios
China: GDP Growth Under Various Scenarios
(Percent)
(In percent)
Difference in Growth Rate Between Baseline
and
Counterfactual Scenario
Difference in Growth Rate Between Baseline and Counterfactual Scenario
Difference in consumption growth Difference in fixed investment growth
7.5
3
2
In percentage points
6.5
5.5
No reform
4.5
Baseline
3.5
1
0
-1
-2
-3
2020
2019
2018
Source: IMF staff estimates
2017
2016
2015
Source: IMF staff simulations.
-4
2016
2017
2018
Source: IMF staff estimates.
2.5
2019
2020
B. Trade Exposure to China
In this section, we look at the export profiles of each country in relation to China’s final
demand. Using value-added data from the OECD-WTO Trade in Value Added (TiVA)
database that covers 62 countries between 1995 and 2011, we measure how much each
country is exposed to China, in terms of the domestic value-added content of its exports for
China’s final demand.9 This variable—domestic value-added content embodied in China’s
final demand—captures both the value-added content a country exports both directly via
exports of final goods or services to China and indirectly via exports of intermediate goods
and services that ultimately reach Chinese final demand (i.e. consumption and investment).
We obtain the value-added data particularly from OECD-WTO TiVA database as it provides
broader country coverage compared to World Input Output Database (WIOD), thereby
enabling us to include more Asian economies and other emerging market economies in our
analysis. Moreover, TiVA treats processing trade more accurately compared to WIOD as
identified in Jones and others (2014), particularly for emerging economies such as China.
The exposure of Asian countries to China’s final demand is higher than that of other
countries or regions (Figure 13). Asian countries as a group also have a high relative
9
TiVa data is only available for the following years: 1995, 2000, 2005, 2008, 2009, 2010, 2011.
25
exposure to China’s investment (vis-a-vis consumption), when compared with the rest of the
world (Figure 13). Asia’s exposure to China’s investment is about 1.8 times its exposure to
China’s consumption, while non-Asia’s exposure to China’s investment is about 1.5 times its
exposure to China’s consumption.
Figure 13. Share of Domestic Value-Added for China’s Final Demand by Region
Share of Domestic Value Added Used for China's Final Demand
(Percent of GDP, 2011)10
Share of Domestic Value-Added Used for China's Final Demand
( In percent of GDP)
(In percent of GDP)
Share of domestic value-added for consumption
Share of domestic value-added for investment
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Average
6
5
4
Maximum
3
2
1
0
Minimum
C
I
World
World
Asia
Non-Asia
AE
EM-COM EM-others
C
I
Asia
C
I
Non-Asia
C
I
AE
C
I
EM-COM
C
I
EM-others
Source: OECD-WTO Trade in Value Added database; and IMF staff calculations.
Note: C= share of domestic value-addedfor consumption; I= share of domestic value-added for investment.
Sources: OECD-WTO TiVA database; and IMF staff estimates.
Note: C = share of domestic value-added for consumption; I = share of domestic value-added for investment.
Within Asia, we also observe some interesting variations across different countries in terms
of a country’s exposure to China. Countries show a great variation not only in terms of the
magnitude of its exposure, but also the pace of increase in its exposure to China’s final
demand. Such diverse export profiles will lead to different degrees of spillover onto its
exports to China or to its GDP growth, as the composition of China’s domestic demand shifts
away from investment toward consumption. Some countries in Asia, such as New Zealand,
have expanded the roles of consumption goods and services exports to China, while Taiwan
Province of China has become closely integrated with China through a substantial exposure
to China’s investment (Figure 14). As such, New Zealand is likely to be in a better position
than Taiwan Province of China to absorb spillovers from China’s rebalancing.
10
We follow the classification of commodity exporters used for the World Economic Outlook (IMF, October
2015). According to this classification, a country is classified as a commodity exporter if the country meets the
following two conditions: (1) commodities constitute at least 35 percent of the country’s total exports, on
average, from 1962 to 2014 and (2) net commodity exports accounted for at least 5 percent of its gross trade
(exports plus imports), on average, between 1962 and 2014. Following these classifications, the emerging
market commodity exporters used for our analysis are Argentina, Brazil, Brunei Darussalam, Chile, Colombia,
Costa Rica, Indonesia, Malaysia, Mexico, Peru, and Russia.
26
Figure 14. Share of Domestic Value-Added for China’s Final Demand: Taiwan
Province of China and New Zealand
(Percent of the country’s GDP, 1995–2011)
Taiwan Province of China: DVA Exported for
New Zealand: DVA Exported for Chinese
Chinese Ultimate Demand—Consumption vs.
Ultimate Demand—Consumption vs.
Investment
Investment
Taiwan POC: DVA Exported for Chinese Ultimate Demand—Consumption vs. Investment
New Zealand: DVA Exported for Chinese Ultimate Demand—Consumption vs. Investment
(In percent ofofTaiwan
POC'sProvince
GDP)
(Percent
Taiwan
of China’s GDP)
(In percent ofofNew
Zealand's
GDP) GDP)
(Percent
New
Zealand’s
DVA in Chinese Consumption DVA in Chinese Fixed Investment
6
DVA in Chinese Consumption DVA in Chinese Fixed Investment
1.6
1.4
5
1.2
4
1.0
3
0.8
0.6
2
0.4
1
0.2
0
0.0
1995
2000
2005
2008
2009
2010
2011
1995
2000
2005
2008
2009
2010
2011
Sources: OECD-WTO TiVA database; and IMF staff estimates.
Note: DVA = domestic value-added
C. Spillover to a Country’s Exports to China in Value-Added Terms
The first step in calculating the potential spillover effects from China’s rebalancing is to look
at the sensitivity of a country’s value-added exports to China’s final demand. We use a
sample of 62 countries at annual frequency from 1995–2011 to gauge how a country’s
domestic value-added has historically responded to China’s final demand.11 The baseline
regression is the following country-specific OLS regression:
where i refers to a country, t is time, D is the real China’s consumption or investment from
the national accounts data. Left-hand side variable,
is the ratio of domestic
value-added to reach China’s D as a share of a country’s GDP. Both variables are in log
terms, and estimations results are reported in the annex tables. The interpretation of
is the
elasticity of a country’s domestic value-added exports as a share of its own GDP in response
11
For years 1995, 2000, 2005, 2008, 2009, 2010, and 2011 we use value added in exports data from OECDWTO Trade in Value Added (TiVA) database. The interim years are interpolated in line with the methodology
specified in Duval and others (2015).
27
to 1 percent change in China’s consumption (or investment). Appendix Tables 1 and 2 report
the country-specific results. We have also tried seemingly unrelated regressions (Zellner
1962), obtaining similar results for the ranking and size of the export spillover effects from
China’s rebalancing.
Using these sensitivity measures for consumption and investment and given reform vs. nonreform scenarios, one can assess the winners and losers from rebalancing as follows. Let us
assume that under a hypothetical rebalancing scenario, China’s consumption grows by
and investment grows by
(where superscript c stands for a country and R a rebalancing
scenario). Also, let the China’s consumption and investment growth under no-rebalancing
scenario (denoted by superscript N) be
and
. We assume that
and
. So, the net change in the exports to China from each country will be
Assuming that
and are positive, the size of the net change depends on the size of betas,
as the first term will be positive and the second term will be negative. If >0, the country
gains from rebalancing. If negative, the country loses from rebalancing.
1. Spillover Results: Unitary Rebalancing
We first look at the spillover effect of a unitary rebalancing, defined as a shift of growth from
investment to consumption when the consumption growth difference is normalized to be 1
percentage point, i.e.
, and the investment growth difference to be -1
percentage point, i.e.
.
Figure 15 shows the average impact on value-added exports to China from unitary
rebalancing: 1 percentage point increase in China’s consumption growth and 1 percentage
point decrease in China’s investment growth. Compared with other regions and other groups,
Asia and commodity exporters will be most negatively impacted from the rebalancing
between investment and consumption.
Similarly, Figure 16 shows the results for individual countries in Asia. Countries closely
integrated to China through the global value chain, therefore exposed heavily to China’s
investment demand will be most adversely affected. Examples are Taiwan Province of China
and Korea. Also, as China’s consumption demand increases, New Zealand will benefit, as it
exports mainly consumption-related products to China. Finally, Figure 17 reports the results
for all countries in the sample, highlighting that the spillover effects will hinge on the
country’s export profile to China.
28
Our results indicate that a broadly growth-neutral rebalancing in China—from unitary
shifting of composition of demand—is likely to have negative spillovers to trading partners,
especially those which are more exposed to China’s investment than to its consumption. The
unitary rebalancing will have little effect on China’s GDP growth itself, because the shares of
consumption and investment are about the same in real terms in China. Nevertheless, it
adversely affects the GDP growth of the average economy in the short term, reflecting
relatively higher exposure to China’s investment in most countries.
Figure 15.
Impact
of Unitary
on Value-Added
Exports
to from
China
Change of Value-Added
Exports to GDP
China's Rebalancing
Change
Value-Added Exports
to GDP from China'sRebalancing
Rebalancing:
1% increase in consumption and 1% decrease in investment
1% increase in consumption and 1% decrease in investment
(Average by Region)
0
Percentage points of GDP
0
Percentage points of GDP
-0.005
-0.005
-0.01
-0.015
-0.01
World
Source: IMF staff estimates.
Asia
NonAsia
AE
EM-COM
EM others
29
Figure 16. Impact on Value-Added Exports to China in Asia: Unitary Rebalancing
Change in Value-Added Exports to China after China’s Rebalancing
Change of Value-Added Exports to GDP from China's Rebalancing
1 percentage point increase in CHN consumption growth and 1
percentage point decrease in CHN investment growth
0.02
0.01
0
TWN KOR MYS PHL AUS SGP JPN THA HKG IND IDN NZL
-0.01
-0.02
-0.03
-0.04
-0.05
Source: IMF staff estimates.
Note: Note: AUS = Australia; HKG = Hong Kong SAR; IDN = Indonesia; IND = India;
JPN = Japan; KOR = Korea; MYS = Malaysia; NZL = New Zealand; PHL = the Philippines;
SGP = Singapore; TWN = Taiwan Province of China; THA = Thailand.
Figure 17. Average Impact on Value-Added Exports to China: Unitary Rebalancing
Impact on Partner Country Value Added Exports to China
of 1 percentage point change in the growth rate of consumption/investment in China
(Percentage points of GDP)
Source: IMF staff estimates.
30
2. Spillover Results: Medium-Term Growth Projections
We now turn to analyzing the impact on domestic exports to China using the growth
projections of consumption and investment presented in Figure 12. First, we estimate the
effects of the 2016 growth projections of China. Figure 18 shows that exports from each
country that ultimately reach China’s final demand in value-added terms will decline in 2016.
This is mainly due to the growth projection that assumes a lower growth of both consumption
and investment compared with the counterfactual scenario in 2016.
Figure 18. Impact on Value-Added Exports to China from the Projected Rebalancing:
By Region in 2016
Source: IMF staff estimates.
31
Now, we incorporate the medium-term projection to estimate the medium-term spillover
effects from China’s rebalancing. From the projection in Figure 12, positive effects on the
overall growth from rebalancing are expected to materialize from 2019. This boost to overall
growth from rebalancing is supported by the higher growth of both consumption and
investment, compared to the no-reform scenario, while the consumption growth picks up
more than investment growth.
Figure 19 shows the results by using the growth projections for 2018 and 2019. In 2018, most
countries still lose in their exports to China as a share of its GDP, as the overall growth rate is
lower under rebalancing compared to the counter-factual. There are some exceptions to the
case. For instance, New Zealand gains in 2018, as its exports for China’s consumption are
substantial enough for its total exports to benefit from the higher growth of consumption that
starts in 2018. On average, though, most economies continue to lose in 2018. Asia and
emerging-market commodity exporters are the largest losers under this particular growth
path.
As the overall growth begins to benefit from rebalancing compared with the counterfactual in
2019, supported by both higher growth of consumption and investment, countries begin to
gain from rebalancing. Interestingly, Asia benefits most compared to non-Asian countries
under this projection. This is in line with the fact that the sheer magnitude of exposure to
China’s final demand is much higher in Asia compared to other regions (Figure 13).Mediumterm calculations, however, are subject to large uncertainty, not least because the estimated
elasticities can change substantially and growth can take different paths.
Figure 19. Impact on Value-Added Exports to China from Rebalancing: By Region
over Medium-Term
Change of Value-Added Exports to China
Change of Value-Added Exports to China
(Percentage points of GDP)
(Percentage points of GDP)
Source: IMF staff estimates.
32
D. Impact of China’s Consumption-Investment Rebalancing on Partner Country GDP
Growth
This section estimates the growth impact coming from shocks to China’s consumption and
investment growth, transmitted through the trade channel via consumption and investmentrelated trade separately. The difference between this and the previous section is worthy of a
short discussion. The previous section’s analysis can be called as the “first-round” effect of
rebalancing, as it has not incorporated the full propagation effects through the global
economy. As China’s rebalancing affects all countries via trade, overall economic activity of
each country will be affected, in turn generating the second-round effects on trade among
themselves. For a small open economy, this second round effect can be no smaller than the
first round effect, as illustrated in Kireyev and Leonidov (2016). In addition, key global
prices will be adjusted as economies go through second and higher round effects, producing
further repercussions on global economic activity and trade of the world economy. Although
we do not have an empirically-based general equilibrium model which can fully account for
multi-round and multi-dimensional repercussions, we make an attempt to go beyond the firstround effects and estimate the effects of rebalancing on GDP growth of each country in this
section.
The estimation proceeds in two steps. The first step estimates the shocks to China’s
consumption growth and investment growth. The second step estimates the response of each
country’s growth to them separately, allowing the responses to vary with the strength of
bilateral trade linkages with China. These estimates enable us to calculate how the GDP
growth of each country responds when China’s consumption and investment growth rates
change as a result of rebalancing from investment toward consumption.
Shocks to China’s consumption and investment growth are estimated on the basis of a four
variable VAR: global GDP, growth rates of Chinese GDP, consumption, and investment;
and
where t is year. Shocks thus
estimated are used as follows, to calculate the growth effect of shocks to consumption and
investment.
Growth effects of shocks to consumption or investment are estimated as follows:
where,
stands for GDP growth of country i at time t; superscript D stands for China’s
consumption or investment demand;
denotes shocks to growth in China’s D
(consumption or investment); and
denotes other controls including VIX to control for
global financial uncertainty and global commodity prices.
captures direct
33
and indirect bilateral trade linkages with China measured as domestic valued added of
country i exported for Chinese final consumption, in percent of country i’s GDP.
The propagation of investment/consumption growth shocks originating from China to each
country’s growth incorporates the interaction term between the demand shock and trade
linkage:
.
The net effect of rebalancing on GDP growth is constructed in the equivalent way as in the
effects on exports, by applying the growth rate differentials to the estimated growth effects of
shocks to consumption and investment.
Results from a panel estimation over 1995–2014 are presented in Table 4. The interaction
term between investment growth shock and the trade linkages is statistically significant at 1
percent, confirming the propagation of shocks strengthen with trade linkages.12
Table 4. Spillovers from China’s Consumption/Investment Growth Shock to GDP
Growth
Dependent variable: GDP growth of country i
Year 1
China investment growth shock X Trade exposure
China investment growth shock
Investment
0.019***
0.048***
China consumption growth shock X Trade exposure
China consumption growth shock
Year 2
China investment growth shock X Trade exposure
China investment growth shock
Observations
R-squared
Source:IMF
IMFstaff
staffcalculations.
calculatons
Source:
Robust
t-statistics
in parentheses
Note:
Robust
t-statistics
in parentheses.
p<0.01,****p<0.05,
p<0.05,* *p<0.1
p<0.1
******p<0.01,
12
0.067
0.043
0.021***
0.025**
China consumption growth shock X Trade exposure
China consumption growth shock
Additional controls
Constant
Country FE
Time FE
Consumption
0.002
0.041**
0.046
0.040
0.019*
0.021
Trade exposure (investment
related), VIX, oil prices
Y
Y
Y
Trade exposure (consumption
related), VIX, oil prices
Y
Y
Y
1,140
0.267
1,140
0.224
While the interaction term between consumption growth shock and the consumption trade linkage is not
statistically significant by itself, the interaction term and the consumption growth shock variables are jointly
significant at 1 percent (F statistic=8.77).
34
1. Unitary Rebalancing
Using the estimated coefficients from above and the historical value-added trade data, we
then estimate the GDP growth exposure of the partner countries propagated through the
ultimate final demand-related trade channels. Trade linkages are assumed to be at the latest
available historical data (i.e. 2011). We find that a 1 percentage point positive shock to
consumption growth and 1 percentage point negative shock to investment growth would
yield an overall negative impact to the GDP growth of the average economy in the sample.
Moreover, countries that are more exposed to China’s investment are affected more
adversely by a 1 percentage point shock to China’s investment growth, despite a positive
shock to Chinese consumption growth. The average Asian economy will experience a larger
decline in its growth given the heavy reliance of its value-added exports on China’s fixed
investment (Figure 20, left panel), compared to the average non-Asian economy.
Furthermore, the adverse growth impact due to +/- 1 percent change in China’s
consumption/investment growth on the average commodity exporting emerging economy is
higher than on other emerging economies or the average advanced economy (Figure 20, right
panel).13
Within the sample of 62 countries and particularly in Asia, there exists significant
heterogeneity in growth exposures (Figures 21 and 22); for instance, New Zealand in fact
faces less negative growth spillovers given that value-added exports vis-à-vis China includes
more Chinese consumption-oriented exports. On the other hand, Asian economies exporting
investment-related goods and services such as machinery (e.g. Taiwan Province of China and
Korea) as well as less-diversified commodity exporters could face significantly larger
negative growth spillovers.
2. Deducing the Role of Rebalancing in the Past Decade
In order to put the magnitudes presented in section D.1 into context, we consider a historical
scenario based on actual changes that occurred between 2001–07 and 2011–15. Over these
two periods, China’s GDP growth rate declined by 3 percentage points. To deduce the role of
rebalancing over these periods, we assume a counterfactual non-rebalancing scenario in
which both consumption and investment growth rates declined by the same 3 percentage
points. Between the two periods, in actuality, China’s consumption growth rate rose by 0.1
percentage point, while the investment growth rate fell by 5.5 percentage points. We thus
assume a rebalancing effect in China between 2001–07 and 2011–15 of 3.1 percentage points
for consumption (0.1-(-3)) and -2.5 percentage points for investment (-5.5-(-3)).
13
Robustness checks, using a different ordering of VAR to identify shocks to China, produce similar results
(Figure 25).
35
Combining these historical deviations with the estimated effects of consumption and
investment slowdown (Table 4), we find that this rebalancing in China would have led GDP
growth to decline by 0.06 percentage point for the world, and 0.12 percentage point for Asia,
as shown in Figure 23. Another counterfactual calculation enables us to put these numbers
into context. The 3-percentage-point decline in China’s growth between 2001–07 and 2011–
15 periods would have resulted in a 1-percentage-point decline in Asia’s growth, using the
spillover estimates of IMF (2014). That is, the rebalancing effect accounted for about 12
percent of overall spillovers from China’s growth slowdown on Asia’s growth over the same
period.
Among Asian economies, effects are larger for economies exposed to China’s investment
demand such as Korea and Taiwan Province of China. In contrast, the effect on New
Zealand’s growth is positive owing to its high exposure to China’s consumption demand, as
the rebalancing increased the consumption growth rate more than it decreased the investment
growth rate between the 2001–07 and 2011–15 periods.
3. Medium-Term Growth Projections
Next, incorporating the consumption and investment growth profiles presented in Figure 12,
we estimate the impact on partner country GDP growth once China’s consumption growth
starts to pick up in 2018 under the reform scenario vis-à-vis the no-reform scenario (Figure
24). In 2018 negative growth spillovers still dominate as investment growth differential
between reform and no-reform scenarios remains negative. Specifically, the overall negative
spillover is estimated to reach about 0.17 percentage point for the average country in the
world, while this negative impact is much larger for the average Asian country, reaching
nearly 0.21 percentage point given the large exposure to China’s investment. In subsequent
years, owing to further realization of the productivity gains while China’s growth becomes
more sustainable, both consumption growth as well as investment growth differentials
between reform and no-reform scenarios turn positive. Hence subsequent to 2018, all partner
economies could receive positive GDP growth spillovers as China’s growth becomes more
sustainable. For instance, in 2019, the average economy in the world will gain positive
growth spillovers of 0.12 percentage point, while the positive spillovers into the average
Asian trade partner will be slightly higher at around 0.14 percentage point due to Asia’s high
exposure to China’s investment demand.
36
Figure 20. Impacts on GDP Growth of a Unitary Rebalancing
Average Impact on Partner-Country GDP Growth
(Percentage points of GDP)
Source: IMF staff estimates.
Figure 21. Impacts on GDP Growth of Asian Countries: Unitary Rebalancing
Impact on Partner Country GDP Growth of a 1 Percentage Point
Change in the Growth Rate of Consumption/Investment in China
(Percentage points of GDP)
Source: IMF staff estimates.
Note: AUS = Australia; BRN = Bahrain; CHL = Chile; KOR = Korea; MYS =
Malaysia; PHL = the Philippines; SAU = Saudi Arabia; SGP = Singapore;
TWN = Taiwan Province of China; ZAF = South Africa.
37
Figure 22. Impacts on GDP Growth: Unitary Rebalancing
Estimated Impact of 1 Percent Investment/Consumption Growth Surprise in
China on Partner Country Growth Transmitted Through the Trade Channel
(Percentage points of GDP)
Source: IMF staff estimates.
Figure 23. Impact of Historical Rebalancing on GDP Growth
(3.1 percentage point increase in Chinese consumption growth and 2.5 percentage point decrease in Chinese
investment growth over non-rebalancing scenario)
(Percentage points of GDP)
By Region
By Country (Asia)
0
0.10
-0.02
0.05
0.00
-0.04
-0.05
-0.06
-0.10
-0.15
-0.08
-0.20
-0.1
-0.25
-0.30
-0.12
-0.35
-0.14
World
Asia
Non-Asia
AE
EM COM EM Other
-0.40
TWN KOR MYS SGP PHL AUS JPN HKG VNM THA IDN IND NZL
Note: AE = advanced economies; EM COM = commodity-exporting emerging markets; EM Other = other
Source: IMF staff estimates.
Source:
IMFmarkets.
staff estimates.
emerging
Note: AUS
= Australia;
= Hong Kong
IDN = Kong
Indonesia;
INDIDN
= India;
JPN = Japan;
= Korea;
Note: AE – advanced economies; EM COM = commodity-exporting emerging markets; EM Other = other emerging
markets;
AUSHKG
= Australia;
HKGSAR;
= Hong
SAR;
= Indonesia;
INDKOR
= India;
JPN =
= Malaysia;
= New Zealand;
PHLof= China;
the Philippines;
= Singapore; THA = Thailand; TWN =
Japan; KOR = Korea; MYS = Malaysia; NZL = New Zealand; PHL = the Philippines; SGP = Singapore; THA =MYS
Thailand;
TWNNZL
= Taiwan
Province
VNM =SGP
Vietnam.
Taiwan Province of China; VNM = Vietnam.
38
Figure 24. Impacts on Regional Growth of the Projected Rebalancing
Changes in Partner Country GDP Growth Rates
(Percentage points)
Source: IMF staff estimates.
Figure 25. Different Measures of Shocks to Consumption and Investment
Source: IMF staff estimates.
Note: Y_w = global GDP; Y = Chinese GDP; C = Chinese consumption;
I = Chinese investment.
39
V. CONCLUSION
This paper explores causes of the recent weakness in China’s imports, which was a large
chunk in the global trade slowdown in 2015. A slowing in the growth of investment and
exports was the key driver, whereas the slowdown in the aggregate GDP growth alone did
not account for it well. Over the past decade, the rebalancing of demand composition away
from investment and exports played a significant role in the slowing of China’s imports.
The paper also estimates spillover effects from a rebalancing of demand in China from
investment toward consumption. Asia will sustain a larger loss than other regions, and so will
commodity-exporting emerging markets. For most countries, spillover effects from the
rebalancing in China’s demand are negative in the short term, and turn positive only over the
medium term when the reform-cum-rebalancing boosts China’s growth higher than under the
alternative of no-reform or rebalancing.
40
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_____. 2014. Regional Economic Outlook. Asia and the Pacific, April.
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42
VII. APPENDIX
A. OECD Input-Output Database
Link: http://www.oecd.org/trade/input-outputtables.htm
The I-O tables describe the sale and purchase relations between producers and
consumers within an economy.
Examples of I-O-based globalization indicators include: the import penetration ratio of
intermediate and final goods, the import content of exports (an indicator of vertical
specialization), the unit value added induced by exports.
The maximum number of sectors is 48: 2 mining, 22 manufacturing, 23 services, 1
agriculture. Imported intermediaries and domestically provided inputs are separated.
Input matrices:

. (Raw data) Amount of domestically produced inputs from sector i
needed by sector j for production throughout the year of reference.

. (Raw data) Amount of imported inputs from sector i needed by sector j
for production throughout the year of reference.

. Amount of domestically produced inputs from sector i
needed to produce one unit of output in sector j. The column j of “output” is sector j’s
total output.

. Amount of imported inputs from sector i needed to
produce one unit of output in sector j.

. Final demand of domestically produced goods and services (each
column refers to a different expenditure component: household consumption,
government consumption, exports, gross fixed capital formation/investment, change
in inventories, etc.)

. Direct imports of goods and services by final expenditure components.
Use both domestic and import matrices to to construct the import content of four expenditure
components (C, G, I, X). Aggregate information across sectors and look at the import
contents only at country level.
The matrices also allow computing, for each expenditure component k, value of
indirect imports: i.e., the amount of imports induced by expenditure on domestically
provided goods and services. These include imports of intermediate inputs from foreign
suppliers, as well as imports that are already incorporated in capital and intermediate inputs
acquired from domestic suppliers.
The “import” matrix allows computing value of direct imports for each k.
Consider S sectors and K final demand components. Domestic output in each sector i
is used both as intermediate inputs for other sectors and to satisfy final demand.
The domestic output from sector i needed to satisfy/produce final demand from k is
43
In matrix form (S × K)
Solve it to obtain
The matrix
is refered to as Leontief Inverse.
The imports of intermediate inputs from sector i induced by the expenditure on
domestically provided goods and services for each k: expenditure component k induced
intermediate imports (i.e., indirect imports, so as to separate from direct imports!)
In matrix form
Note that
Total imports is
Let 1 be S × 1 of ones. The total import content for each expenditure component k is
Accordingly,
,
can be decomposed as direct and indirect import content:
Define import intensity-adjusted measure of demand (IAD)
The total import contents are normalized in each period so that they sum up to one.
B. Database


http://www.wiod.org/
http://www.oecd.org/trade/input-outputtables.htm
Appendix Table 1. Sensitivity of a Country’s Value-Added Exports to China’s Final Consumption Demand
Source: IMF staff estimates.
45
Appendix Table 2. Sensitivity of a Country’s Value-Added Exports to China’s Final Investment Demand
Source: IMF staff estimates.